The Indian mobile subscriber base is likely to sustain the rapid growth recorded in the past few years. Presence of skilled labour pool, improving telecom infrastructure, favourable demographics, rising disposable incomes of consumers, declining tariffs, increasing demand, growing attraction for mobiles with new features and greater availability of handsets at lower prices, are expected to continue driving the growth of the telecom sector, going forward. However, the companies are likely to encounter a more challenging business environment in the near future, given the sustained fall in ARPUs, rapidly increasing competition and consequent pressure on margins and regulatory risks. Companies with good rural coverage, better operational efficiency, and superior quality of service are likely to stay ahead of competitors. The industry will also witness the mergers of relatively smaller companies with the big players. Only big three or four players will dominate the market and direct price war may stop and Industry will agree on a standard pricing and competition will on the services and offerings.

1. Indian Telecom Industry –
Microeconomic Study
Dipankar Mishra

2. Indian Telecom Industry – Microeconomic Study
Market Structure
Indian telecommunication market is one of the largest in the world, with the number of
telecom subscribers second only to China's. In terms of infrastructure, India's telecommunication
network is the third largest in the world on the basis of its customer base and it has one of the
lowest tariffs in the world enabled by the hyper-competition in its market. The major sectors of
the India telecommunication industry are telephony, internet and broadcasting. Indian telecom
industry underwent a high pace of market liberalization and growth since 1990s and now has
become the world's most competitive and one of the fastest growing telecom markets. India has
the world's second-largest mobile phone user base with over 929.37 million users as of May
2012. It has the world's third-largest Internet user-base with over 121 million as of December
2011.
There are around 15 operators competing in the market for the telecom space in India. As
per the latest annual report from Telecom Regulatory Authority of India (TRAI), the total
revenue in the telecom service sector was INR 1,71,719 crore for the 2010-11 , growth of about
8.7% from the previous year. The capital employed in the sector increased from INR 2,86,837
crore in 2009-10 to INR 3,37,683 crore in 2010-11 i.e. an increase of 17.73 % indicating a
healthy growth of investment in the sector.
There are three types of players in Indian telecom services:
 State owned companies (BSNL and MTNL)
 Private Indian owned companies (Reliance Infocomm, Tata Teleservices,)
 Foreign invested companies (Vodafone, Bharti Tele-Ventures, Idea Cellular, Uninor etc)
Foreign direct investment is increasing and new players are entering the market every year.
Competitive Scenario
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3. Indian Telecom Industry – Microeconomic Study
Owing to the huge competition among the players, price wars are quite evident. 15 years ago
subscribers were made to pay for an incoming call; today they have the liberty to pay for per
second of their usage, with TATA DOCOMO bringing the market disruption by their concept of
per second billing.
The Indian mobile services market is more or less equally divided between GSM and CDMA
customers with the former capturing around 53% of the subscriber base. Currently there are 11
players who are fighting tooth and nail to increase even one single percentage point in their
market share. While Bharti Airtel dominates the GSM arena, Anil Ambani led ADAG‘s Reliance
communications has been leading the CDMA services space in mobile telephony but the good
sign for the sector is that revenues of all the incumbents have increased leading to an increase in
their revenues. In GSM, Bharti Airtel is given a tough competition by Vodafone and Tata
Teleservices which operates Tata Indicom and in CDMA, it is considerably behind Reliance
communications in terms of market share. With Mobile number portability coming into the
scene, the war will be fiercer in this space and there will be a huge swapping of subscribers
among the existing players.
Trends in Demand Supply
Demand Analysis:
 The majority of the Indian population is in the age group of 15-64 years. Mostly users of
mobile phones belong to this category of age. Hence, Indian holds a great potential market
for telecom service providers. Even young generation of India is attracted more and more
towards cell phones and this has become a trend and need of even small children in India.
This assures a high growth in this industry in future.
 Most of the service providers have covered majority of the urban population of India. But
many far fledged villages of India still need to be connected through mobile phones. The
untapped rural population of India is a huge proportion of the 72.2% total rural population of
India. Also, the demand for telecom service in rural people is increasing day by day. This
further ensures growth in the industry.
 Indian telecom continues to register a significant growth each year. This has been due to the
impact of economic reforms and pro-active policies of the government.
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4. Indian Telecom Industry – Microeconomic Study
 The growth of wireless services has been phenomenal, with wireless subscribers growing at a
compound annual growth rate (CAGR) of 87.7 per cent per annum since 2003. The share of
private sector in total telephone connections is now 77% per cent as per the latest statistics
available for Year 2011 as against a meager 5% in 1999.
 It is also envisaged that internet and broad-band subscribers will increase to 50 million and
25 million, respectively, by 2014. As per the latest available statistics for September 2010,
about 12% villages have broadband coverage.
 Foreign direct investment (FDI) is one of the important sources to meet the huge funds that
are required for rapid network expansion. The FDI policy provides an investor-friendly
environment for the growth of the telecom sector. The policy of the Government of India is
to strive to maximize the developmental impact and spin-offs of FDI. At present, 74% to
100% FDI is permitted for various telecom services. The total FDI equity inflows in telecom
sector have been 1451 million USD during 2009-10.
Supply Analysis
 Degree of Concentration : The telecommunications industry is a vast one with a large number
of private players who are constantly bringing down the cost to consumers thereby making
services more affordable and helping improve life in general and business in particular. On
the Indian business scene are successful government owned institutions like MTNL and
BSNL on the one hand, and even more successful and aggressive players like the Tata’s and
Reliance on the other. Competition has just begun and is heating up every day with either
lowering of tariffs or introduction of newer and improved services to keep a larger share of
the market. Reliance, for instance, has been one of the recent, more aggressive players in the
telecom business when it introduced a wireless phone in the market for as low as Rs. 500.
 Ease of entry: Friction exists between existing players and the newer entrants, as also
between the providers of services based on different technologies (CDMA Vs Cellular). The
same needs to be resolved with government intervention through the regulator in order to
further improve the services. The telecom sector today is not a small one and covers various
services and many players within each service. One of the most vibrant developments in
telecommunications has been Cellular telephony – a technology that gives us the power to
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5. Indian Telecom Industry – Microeconomic Study
communicate anytime and anywhere. This segment, a part of the broader telecommunications
industry, has today spawned an entire industry in mobile telecommunication. Mobile phones
today are an integral part of growth, success and economic efficiency of businesses. The
government in India has today recognized, providing world-class telecommunications
infrastructure as the key to rapid economic and social development of the country. Although
the industry requires huge capital investments and due to high entry barrier the sector is
monopolized by small number of players.
 Industry capacity: Conservative estimates put a tag of a 3% increase in the growth of GDP
for every 1% rise in the tele-density in the nation. Accordingly, this sector has received a
great thrust from the government for investments and development.
In spite to huge demand matched up by the service providers there is mismatch between
demand and supply in telecom industry are:
 The demand for 3G and 4G spectrum is more among mobile phone service providers in many
states of India but the supply of spectrum by the Government is not meeting the demand of
the service providers.
 The supply for landline telephones are more but the demand for landline telephones are
getting reduced as a result extensive use of mobile phones and internet calling.
 There is a demand for hi-speed internet connection in different parts of the country but those
demands are not met by the service providers in telecom industry and the supply of
broadband connection by service providers are not meeting the demand in market.
 The supply of mobile connection by different mobile phone service providers is not meeting
the demand generated by the people in the market.
 The demand for manufacturing mobile phones by many mobile phone manufactures is
increasing in India but the various policy of Indian government and restricted supply of raw
materials is not meeting the demand of mobile phone manufacturers.
 The supply of radio service is more in the country is more but the demand for radio services
has decreased as a result of the involvement of visual media and other forms of
communication.
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6. Indian Telecom Industry – Microeconomic Study
Cost and Price Elasticity
The spectrum prices have increased considerably and as the result the expansion requires huge
capital investment. Though the subscriber is increasing year on year, but due to heavy
competition the tariff rates are lowest in the world. The call rates dropped from INR 16.80 in
1995 to INR 0.30 in 2012. Operators have been announcing new promotional schemes including
reduction in tariffs for voice call, slashing roaming charges and many more such lucrative offers.
Due to the fierce price war the profit margin and return of capital has been declining over the
years. Providers are trying to maintain the profit margins by “economics of scale” and by
providing “value added services”
Customers, due to competitive pricing have become “elastic” and easily switch to the provider
who provides the services at a lower tariff. There is not much of brand loyalty as there is hardly
any differentiation in the services.
Profitability
India has almost 600m active mobile-phone subscribers—about one for every two people,
including babies. It also has among the lowest prices anywhere, and a home-grown, world-class
operator, Bharti Airtel. India's mobile-phone industry inspires great hopes. Prices have fallen to a
level the poor can afford. Firms have become leaner, too. Bharti outsources furiously. Most
companies share radio towers and have learned how to compress traffic.
Yet the industry is not getting the returns that corporation would expect. Only one of the big four
firms was close to recouping its cost of capital last year, as the price war hit margins and an
expensive 3G spectrum auction in 2010 bloated balance-sheets. Vodafone has a rich parent
company but the others are now uncomfortably indebted. Middle-sized operators, meanwhile, are
thought to be bleeding badly. Of the small fry, only two disclose figures: Uninor, run by Telenor,
a Norwegian firm; and Russian-backed Sistema. Together they lost almost $2 billion of cashflow
last year.
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7. Indian Telecom Industry – Microeconomic Study
Operational and Asset Utilization Efficiencies
The telecom industry value chain is complex, so we have to divide it into network infrastructure,
operations, distribution, creation of services, and customer acquisition, to understand where cost
reduction is pertinent. Cost is currently pursued in the relevant areas such as infrastructure,
operations, and distribution, since some of the services are commoditising, and capex-to-sales
ratio for telcos is still very high. The Indian Telecom Network capacity utilization has been on
the upswing with rising traffic. 3G network utilization however is still low given limited 3G
handsets and have seen substantial tariff cuts by operators to increase data uptake. Point to note
that there is no material differences across network operators both on 2G and 3G. Some of the
major players are able to utilize their capacity well but small players are still struggling to get the
market share (subscriber base) to utilize their full capacity.
Problems faced by the Industry
The heavy competition has following impacts to the industry:
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8. Indian Telecom Industry – Microeconomic Study
 Market Saturation: The market is saturated with urban tele-density (number of telephones
per 100 persons) reaching 167% and overall national average is 76%. Further increase of the
customer base seems difficult in the coming years. (Figure 1)
Figure 1: Tele-Density on India; source: DOT Annual Report
 Price War: The industry is one of the most competitive and has the lowest tariff rates than
anywhere in the world. The call rates dropped from INR 16.80 in 1995 to INR 0.30 in 2012.
Operators have been announcing new promotional schemes including reduction in tariffs for
voice call, slashing roaming charges and many more such lucrative offers. Due to the fierce
price war the profit margin and return of capital has been declining over the years (Figure
2&3).
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9. Indian Telecom Industry – Microeconomic Study
Figure 2- Return on Capital Figure 3 – Market Share of Indian Telecom Operators
 Declining ARPU: Average revenue per user (ARPU) has been falling year on year and most
of the major players have been losing between 10 to 20% in ARPU and going to decline
further. This trend is having negative impact on the bottom-line of all the players. The EPS
for almost all telecom companies are going down and a result share prices is in a declining
path.The tariff war and the trend in declining revenue per user is not a sustainable model
going forward as bottom line growth is seems muted in the coming years.
Expected Changes in Next Five Years
While uncertainty looms large, the current TRAI recommendations of a high reserve price for the
upcoming auctions is likely to deter new entrants and should aid in consolidation in the medium
term. Sector outlook can change dramatically based on decisions on spectrum pricing and re-
farming. With declining sources of revenue, a declining trend witnessed in ARPU’s and MOU’S,
saturation of urban customer base, increasing competition and regulatory hurdles makes telecom
an unfavorable play to be in at the moment and until there is a clear picture on revenue front
which would come out after 3G auctions.
The way the industry is moving following trends can be seen in near future:
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10. Indian Telecom Industry – Microeconomic Study
 Infrastructure Sharing – A Profitable Proposition
The rapid expansion in subscriber base has brought to the fore the challenge of increasing
and upgrading the telecom infrastructure to maintain quality of services. In the recent years,
infrastructure sharing has emerged as a profitable proposition for both the parties involved, as
for the tenant it lowers capex and opex, and for the owners, it is an additional source to earn
revenue. It would lead to considerable reduction in initial set-up costs for new service
providers and existing service providers planning to enter new service areas. Infrastructure
sharing might assist the service providers to reduce their operating costs. The cost saving
through infrastructure sharing could be passed on to the customers thereby augmenting their
affordability. Further, with infrastructure sharing, the companies can reduce the time required
to roll out the telecom services in the rural areas. The sharing of telecom infrastructure by
companies could lead to optimum utilisation of these resources and thereby improve
efficiency.
 Managed Service – Outsourcing in Telecom
Managed Services typically involve the outsourcing of a specific technical function or
capability to a Managed Service Provider (MSP). It is an alternative to in-house management
or traditional outsourcing since firms/enterprises do not have to transfer complete control
over assets/operations to the MSP but rather can contract or outsource specific management
challenges for a shorter period of time. With the rapidly-growing subscriber base, managing
infrastructure and networks is becoming increasingly difficult for the service providers.
Therefore, many service providers have been outsourcing their infrastructure or network
management operations completely or partially. Given the increasing demand for the
managed services, the telecom equipment vendors could have an opportunity to take up more
roles in the value chain by entering into managed service contracts.
Managed Services are fast-emerging as an attractive proposition for many enterprises that do
not want to dedicate human resources and capital toward acquiring and administering
technology infrastructure. It also allows the telecom service providers to focus on their core
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11. Indian Telecom Industry – Microeconomic Study
activities, to develop new and innovative products and services so as to distinguish
themselves from other players in this highly-competitive market. The service providers can
gain significantly in terms of cost reduction and improved efficiency in operations from the
economies of scale that an MSP can offer.
Conclusion
The Indian mobile subscriber base is likely to sustain the rapid growth recorded in the past few
years. Presence of skilled labour pool, improving telecom infrastructure, favourable
demographics, rising disposable incomes of consumers, declining tariffs, increasing demand,
growing attraction for mobiles with new features and greater availability of handsets at lower
prices, are expected to continue driving the growth of the telecom sector, going forward.
However, the companies are likely to encounter a more challenging business environment in the
near future, given the sustained fall in ARPUs, rapidly increasing competition and consequent
pressure on margins and regulatory risks. Companies with good rural coverage, better
operational efficiency, and superior quality of service are likely to stay ahead of competitors.
The industry will also witness the mergers of relatively smaller companies with the big players.
Only big three or four players will dominate the market and direct price war may stop and
Industry will agree on a standard pricing and competition will on the services and offerings.
Dipankar Mishra Page 11